Paul Harris Cayman Islands Directors Association President	Tim Ridley Former chairman of the CIMA	Lord Turner Head of Britain’s Financial Services Authority

By Kevin Shereves
Kevin@caymannetnews.com

The concept of taxing financial transactions is gathering international support. A letter to the editor of London’s Financial Times suggests that a financial transaction tax could raise new sums of money for development. However, some local commentators are resistant to introducing such a tax in the Cayman Islands.

The concept of a levy on financial transactions is often referred to as a “Tobin tax,” after James Tobin, PhD, a Nobel laureate economist at Yale, and was, when originally proposed, limited to foreign currency transactions, which would allow national governments to stop their economies being at the mercy of speculators.

The letter published by the Financial Times, and signed by various charitable advocates, including Oxfam Head of Development Finance, Max Lawson, and Action Aid Head of Policy, Claire Melamed, said that at a time when the budgets of rich and poor countries alike are being squeezed because of the economic crisis, a tax on banks is a bold, just, and practical idea for raising substantial new sums of money for development over and above existing aid pledges.

However, President of the Cayman Islands Directors Association, Paul Harris, noted that the ramifications of a tax on transaction fees are extremely complex both in the UK and Cayman. He noted that a good deal of research needed to be done to see whether such a tax would have such an adverse effect that some businesses would locate elsewhere to avoid it.

“On the one hand, it would appear fairly inconsequential that a small government fee be added on to a bank charge for remittances in and out of accounts. The banks do not pay the fees - the customer does,” Mr Harris noted.

“Most customers are used to paying bank charges and would probably not even notice an additional government charge, which the banks could easily collect along with their own charges. Such a fee could be an attractive alternative to our traditional fees on financial services which have now reached a dangerous plateau.

“On the other hand however, the banks here are very much against such a move. As I said, much research needs to be done, but the potentially large revenues to be derived from such a fee make it worthwhile to explore the possibility fully,” Mr Harris said.

“Without doubt we must not do anything which may upset our banking, funds, insurance and capital markets business, but it does seem that the use of exemptions, where warranted, could eliminate any such risk,” he added.

Former chairman of the Cayman Islands Monetary Authority, Tim Ridley, said the idea of introducing a transaction tax has been around for several decades in various forms.

“The originator of the idea of a global tax on all currency transactions, Mr Tobin, recanted before his death and said the idea was unworkable (and easy to evade) unless all nations imposed it at the same time. This, he sensibly concluded, was unlikely,” Mr Ridley noted.

“The extension of the idea to cover all financial transactions suffers from the same practical defects,” Mr Ridley added.

“There are many sensible ways to learn the lessons of the financial crisis and, as an entirely separate issue, to help alleviate global poverty. But the financial transactions tax is unlikely to solve either,” he further noted.

The Financial Times letter said that the actions of bankers and weak financial regulation in Europe and North America made a massive contribution to the global economic crisis, which is forcing 100 more people a minute into extreme poverty.

The writers noted that a financial transaction tax would meet this human cost of the crisis and could help developing countries deal with climate change, build their health systems and achieve the Millennium Development Goals. The UK government, alongside Germany and France, should be supported in building wider international commitment behind this bold initiative.

An earlier report in the Wall Street Journal noted that, with budget deficits soaring, US policymakers and other advocates were eyeing the huge sums that could be raised from taxing transactions as a way to cover the costs of new initiatives.

Recently, Lord Turner, head of Britain’s Financial Services Authority (FSA), has also been championing such a levy on financial dealings.